A 10-unit apartment building in Oakland sold for $2,800,000. The property generates $20,000 per month in gross rents with a 4% vacancy rate. Annual operating expenses are $96,000. What is the cap rate implied by this sale?
Correct Answer
A) 4.80%
PGI = $20,000 x 12 = $240,000; EGI = $240,000 x 0.96 = $230,400; NOI = $230,400 - $96,000 = $134,400; Cap Rate = $134,400 / $2,800,000 = 4.80%.
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Previous Question
A 6-unit apartment building in San Francisco is subject to rent control. Contract rents total $15,800/month. The appraiser determines a 3% vacancy rate, annual operating expenses of $72,000, and applies a cap rate of 4.5% to reflect rent control risk. What is the income approach value based on contract rents?
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A California real estate agent explains to an investor that the Gross Rent Multiplier (GRM) is a simplified method of property valuation. Compared to the capitalization rate method, what is the main limitation of the GRM approach in the California market?